World economy set for slightly brighter year: Reuters polls

January 23, 2013|Andy Bruce | Reuters

(Aly Song Reuters, REUTERS)

LONDON (Reuters) - The world economy should perform slightly better this year because recovering growth in Asia will gradually overpower the political and economic malaise in the West, according to Reuters polls.

The latest surveys of more than 600 economists worldwide, released on Wednesday, showed global economic growth is likely to hit 3.3 percent this year following an expected 3.1 percent growth in 2012 - a slight cut to forecasts from a poll three months ago.

The outlook for this year hinges to a certain extent on whether emerging economies such as China and Brazil finally deliver the upturn that many economists had expected in 2012.

The main threats to the stability of the world economy lie in Europe and the United States, and they have a now-familiar ring to them.

U.S. politicians must again strike a deal in March to avert a potentially severe budget tightening that could stall the world's No.1 economy, and the global engine with it.

And recession-hit Europe will still drag on its main trading partners for as long as the euro zone's sovereign debt crisis smolders.

"Our expectation is that it could be a little better than last year globally, but not much," said Andrew Brigden, chief economist at Fathom Financial Consulting in London.

But there are some reasons for optimism.

"The U.S. will slow, but certainly avoid a recession, we would hope. Most other places will improve slightly."

Analysts have hiked their growth forecasts for Japan, the world's third-largest economy, just as authorities unveiled a raft of new stimulus, although probably not by enough to yield a wider impact on the world economic outlook.

There also have been signs China has passed the low ebb of its slowdown, while many analysts expect economic reforms in India to finally start bearing fruit.

World stocks have rallied strongly over the last few months and market volatility has plummeted, at odds with the fact there has been little change in economic fundamentals.

RISKS RECEDING?

At least some of the biggest risks to the world economy seem to have receded, even if they have not disappeared.

"Going back 12 months in time, our biggest risk would have been the euro breaking up as a single currency, and we put more or less a 50-50 weight on that," said Brigden.

"Now, the risk is still there, but it's a lot smaller, we'd say about a 15 percent chance."

Even so, the euro zone's ravaged economy will contract again this year, challenging the European Central Bank's claims of a turnaround in the bloc's fortunes, according to the latest poll.

Economic weakness is also expected to cost Britain its top credit rating for the first time since 1978.

Budget negotiations in the United States, and the potential effects on its economy, are now the main focus for markets.

Most agree that major business spending and hiring decisions are on ice until the big budget fights are over. That means that the economy will remain in low gear, likely growing around 2.0 percent for this year as a whole.

"There's not a lot of incentive to get ahead of these decisions, so business leaders are pretty much keeping things close to the vest," said Sam Bullard, senior economist at Wells Fargo in Charlotte, North Carolina.

With the world now more reliant on China for growth than ever, economists were at least hopeful it would enjoy a better year than 2012, a poor one by its standards.

Chinese economic growth is likely to rebound this year to 8.1 percent in 2013 from 7.8 percent last year, the weakest pace in 13 years.

Similarly, emerging rival India should pick up steam this year after likewise suffering a dismal 2012.

"The lift in global momentum into year-end is most visible in (emerging market) Asia," said Bruce Kasman, chief economist at JPMorgan, in a research note.

"And while the fiscal drag in the U.S. will no doubt ripple through the region, a sense of strengthening underlying momentum and fading tail risks will provide support for growth."

The likes of Singapore, Hong Kong and South Korea bore the brunt of the downgrades to the outlook among Asian economies.

In terms of monetary policy, economists expect few major shifts ahead, especially among major advanced economies.

"The stage is set for an improvement in business conditions over the next few months, but with no major policy shifts in prospect beyond Japan, the recovery is likely to be gradual," said Simon Hayes, chief UK economist at Barclays.